Briefs of Tax/Commercial Law

From Taie.com.tw

1. A GREEN LIGHT FOR TREASURY STOCK

The Legislative Yuan passed an amendment to the Security Trading Law at the end of June, which provides a legal basis for holding treasury stock in this country.

The Company Law in Taiwan has never recognized treasury stock, which is stock issued by a company but later re-acquired by the company itself. Article 167 of the Company Law expressly prohibited a company from redeeming, or repurchasing any of its own shares, or accepting any of them as security, unless a shareholder is in liquidation or adjudged bankrupt. Now as a result of the amendment, this restriction has been substantially lifted, at least for public companies.

One interesting point is that, under the current structure of the law, the treasury stock system may actually function in both ways. In addition, the newly legalized acquisition of shares by the issuing company, a subsidiary company is, thanks to the interpretation of law by the Ministry of Economic Affairs in 1992, also allowed to acquire stock of its parent company from the stock market. As the MOEA interpretation has not been repealed along with the amendment to the Securities Trading Law, both channels will coexist in the days to come. Based on a survey, over 200 public companies have been purchasing or selling their own stocks through their subsidiaries thereby exploiting the loophole created by the interpretation.

Treasury stock differs from stock purchased by a subsidiary company in that a company can acquire the former only if certain statutory requirements are met, and the stock must be disposed of by the company within 3 years after the date of acquisition unless that stock has been retired. On the other hand, a subsidiary is not subject to the same restrictions in purchasing stock of its parent company, although the profit or loss in dealing with the stock will be ultimately transferred to the parent company.

Although the new regulation has received loud praise in the stock market, some officials have expressed concerns that major shareholders may use the treasury stock system to manipulate share prices. Close scrutiny is needed to prevent major shareholders from getting an unjust benefit by using the capital of the company to reacquire the company stock in their own possession at an unreasonable price.


2. ENTERPRISES MAY SET ASIDE A RESERVE FOR LOSS CAUSED BY OVERSEAS INVESTMENTS

To encourage enterprises to make investments abroad under the caption for the upgrade of industries, the law provides that a company which has obtained approval from the Investment Commission to invest abroad may set aside a reserve in an amount not higher than 20% of that overseas investment capital. That reserve may be applied in the future when an actual loss arises from that overseas investment. One requirement is that the share equity created by such investment must constitute over 20% of the total capital of the business that is the target of investment. That requirement may be lifted if approval has been specially obtained from the Executive Yuan.

According to the "Rules for Examination and Treatment of Outward Investments and Technical Cooperation", any company that has made an investment abroad must submit its Balance Sheet, Statement of Operations and the Benefit Allocation Chart to the Investment Commission for review each year. Only after the investing company has duly met its duty to report and has obtained an approval from the Investment Commission, can the reserve be legally set aside against loss incurred by an overseas investment.